Remember 2009?  President Obama was beginning his first term as US president on the heels of the 2008 crisis. The S&P 500 started the year at 932, dropped to a low of 677 in March before roaring back to end at 1,115. The yield on the U.S. 10-year ended at 3.85% (not a typo!).   Apple’s iPhone, only 2-years old, sold 21 million units and was still fighting to take share from BlackBerry’s maker Research in Motion, whose market cap ended the year at just under $40 billion.  LendingClub closed its Series B, raising an eye-popping $12 million intended to help it reach a stated goal of originating about $500 million of personal installment loans per year…online!  And the Black-Eyed Peas had a good feeling and topped the charts.

Also in 2009: the US passed a number of new laws and regulations to institute protections for consumers, which ultimately led to the creation of the Consumer Financial Protection Bureau (CFPB).  One of the CFPB’s responsibilities is to report to Congress every two years on the state of the consumer credit market, and so, during the third quarter of 2021, the CFPB issued its fifth report.  Most striking in the most recent report is section 7, titled “Innovation”, which discusses the rise of digital private credit in its various forms, from personal installment loans to Buy Now, Pay Later.  The report concludes that digital engagement continued to grow consistently across “all age groups and every platform type.”

So much has changed for Fintech since 2009 and LendingClub’s Series B.  The sector’s “coming of age” is corroborated by activity across the board.  According to a recent report from investment bank FT Partners, the third quarter of 2021 saw record M&A activity of $154 billion across 381 transactions, including Square’s $29 billion acquisition of Afterpay and Goldman’s $2.2 billion acquisition of Greensky.  More impressive: year-to-date financing volume of over $100 billion is about 2x the amounts raised in each of 2018, 2019, and 2020, and around 4x the amount raised in 2017.

Fintech valuations point to optimism about the sector’s prospects and the potential market size of the digital credit opportunity.  As of September 30, LendingClub, Upstart, SoFi, Square, Affirm, Stripe, Klarna, PayPal and Afterpay sported an aggregate $653 billion equity value. An analysis by Coatue Management on Fintech valuations covering a broad swath of both public and private Fintech companies suggests an aggregate value of $1.5 trillion for Fintech.

Publicly disclosed origination metrics from the Fintech platforms further support the CFPB’s findings that digital engagement is growing.  Afterpay notched $16 billion in underlying sales in its fiscal year ending in June of 2021, up over 100% compared to the prior year, and Upstart, LendingClub, Affirm and SoFi each achieved run-rate originations of over $10 billion in loans in their most recent quarter. On the small business side, Square, Shopify and FundingCircle run-rated between $1.5 and 4 billion in loans in their most recent financial results. Combined, we estimate this group of companies will originate over $70 billion during the year — a long way from LendingClub’s $500 million origination goal back in 2009.

While the last decade has seen phenomenal growth for both the Fintech sector as a whole and HCG in particular, we believe the sector is still in the early stages of going mainstream.  Even at around $1.5 trillion of market value, Fintech companies in aggregate have only 1/10^th of the value of publicly traded financial companies, according to media reports.  For a decade, we at HCG have had a good feeling about the inevitable digitization of financial services. Amazon’s impact on retail has already shown us the possibilities.  The biggest unknown was not “if” the digitization would occur, but “when.”  As we approach the end of 2021, we believe that the moment for digital transformation is here and that we are embarking on a new era of fast-paced innovation and adoption.  We’ve got a great feeling.

DISCLAIMERS AND OTHER IMPORTANT INFORMATION

Confidentiality and Non-solicitation: No information herein constitutes an offer or a solicitation to buy or sell any securities or any interests in any product or investment strategy managed by HCG Fund Management LP (“HCG”).  Any offer or solicitation relating to any such investment will be made only by means of confidential offering documents relating to a particular fund  or investment contract and only in those jurisdictions where permitted by law.

Reliance: This information may not be relied upon for investment decision-making purposes. It does not contain all the information necessary to make an investment decision, including the risks, fees, and investment strategies of investment products advised by HCG. Eligible investors are described in official offering documents, all of which must be read in their entirety and will supersede the information contained herein.  No offer to purchase any securities or interests by a prospective investor will be made prior to receipt of all official documents, and no offer to purchase any securities or interests will be accepted without receipt of all official documentation that has been completed to HCG’s satisfaction.

Opinions — No obligation to update:  The information contained herein represents the views and opinions of HCG.  It is intended solely for informational purposes and is not intended to constitute investment, legal, tax or accounting advice.  The views about digital finance investing and estimated future investment opportunities expressed herein reflect those of HCG management as of the date herein and are a reflection of our best judgment at the time.  They are subject to change based on market and other conditions, and we have no obligation to update.  Actual results, however, may prove to be different from our expectations.  No warranty is given to the completeness or the accuracy of the information contained herein.

Suitability and Risks:  Any investment in products managed by HCG is appropriate only for financially sophisticated investors capable of analyzing and assessing the associated risks fully disclosed in the Private Placement and/or Information Memoranda. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The Private Placement and/or Information Memoranda contain this and other information about the investment. A prospective investor should have no need for liquidity with respect to its investment and should view it as long-term and not a trading vehicle.  Additional risks are disclosed in the Private Placement and/or Information Memorandum including, including, limited liquidity and restrictions on transfer of the securities, dependence on HCG’s principals, and short operating history of certain products. As with all private investment funds, investments are deemed speculative and involve risk of loss.

Third Party Data: We do not verify third party data used in certain calculated metrics shown here.